[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
PUTTING THE ``STABLE'' IN ``STABLECOINS'':
HOW LEGISLATION WILL HELP STABLECOINS
ACHIEVE THEIR PROMISE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON DIGITAL ASSETS,
FINANCIAL TECHNOLOGY,
AND INCLUSION
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
MAY 18, 2023
__________
Printed for the use of the Committee on Financial Services
Serial No. 118-25
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
52-937 PDF WASHINGTON : 2023
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HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRANK D. LUCAS, Oklahoma MAXINE WATERS, California, Ranking
PETE SESSIONS, Texas Member
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
FRENCH HILL, Arkansas EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio JUAN VARGAS, California
JOHN ROSE, Tennessee JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York RITCHIE TORRES, New York
YOUNG KIM, California SYLVIA GARCIA, Texas
BYRON DONALDS, Florida NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska WILEY NICKEL, North Carolina
MIKE LAWLER, New York BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee
Matt Hoffmann, Staff Director
SUBCOMMITTEE ON DIGITAL ASSETS,
FINANCIAL TECHNOLOGY, AND INCLUSION
FRENCH HILL, Arkansas, Chairman
FRANK D. LUCAS, Oklahoma STEPHEN F. LYNCH, Massachusetts,
TOM EMMER, Minnesota Ranking Member
WARREN DAVIDSON, Ohio BILL FOSTER, Illinois
JOHN ROSE, Tennessee JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin RITCHIE TORRES, New York
WILLIAM TIMMONS, South Carolina BRAD SHERMAN, California
BYRON DONALDS, Florida AL GREEN, Texas
MIKE FLOOD, Nebraska SEAN CASTEN, Illinois
ERIN HOUCHIN, Indiana WILEY NICKEL, North Carolina
C O N T E N T S
----------
Page
Hearing held on:
May 18, 2023................................................. 1
Appendix:
May 18, 2023................................................. 35
WITNESSES
Thursday, May 18, 2023
Hand, Delicia Reynolds, Director, Financial Fairness, Consumer
Reports........................................................ 11
Homer, Matthew, Managing Member, the Department of XYZ, and
former Executive Deputy Superintendent for Research &
Innovation, New York State Department of Financial Services
(NYDFS)........................................................ 4
Morgan, Robert, CEO, USDF Consortium............................. 6
Portilla, David L., Partner, Davis Polk & Wardwell LLP........... 8
Wang, Fennie, Founder and CEO, Humanity Cash..................... 10
APPENDIX
Prepared statements:
Hand, Delicia Reynolds....................................... 36
Homer, Matthew............................................... 41
Morgan, Robert............................................... 49
Portilla, David L............................................ 59
Wang, Fennie................................................. 67
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Written statement of Americans for Financial Reform.......... 77
Better Market Fact Sheet: ``Un'' Stablecoins and Risks to
Investors, Consumers, and Economic Productivity............ 84
Written statement of the National Association of Federally-
Insured Credit Unions (NAFCU).............................. 94
Written responses to questions for the record submitted to
Fennie Wang................................................ 96
Written responses to questions for the record submitted to
Matthew Homer.............................................. 97
Written responses to questions for the record submitted to
David L. Portilla.......................................... 98
Written responses to questions for the record submitted to
Robert Morgan.............................................. 99
Written responses to questions for the record submitted to
Delicia Reynolds Hand...................................... 100
Written statement of Steven L. Schwarcz, the Stanley A. Star
Distinguished Professor of Law & Business, Duke University
School of Law.............................................. 101
PUTTING THE ``STABLE'' IN
``STABLECOINS'': HOW
LEGISLATION WILL HELP
STABLECOINS ACHIEVE
THEIR PROMISE
----------
Thursday, May 18, 2023
U.S. House of Representatives,
Subcommittee on Digital Assets,
Financial Technology,
and Inclusion,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:02 a.m., in
room 2128, Rayburn House Office Building, Hon. French Hill
[chairman of the subcommittee] presiding.
Members present: Representatives Hill, Davidson, Rose,
Steil, Timmons, Flood, Houchin; Lynch, Foster, Gottheimer,
Torres, Sherman, Green, Casten, and Nickel.
Ex officio present: Representative Waters.
Chairman Hill. The Subcommittee on Digital Assets,
Financial Technology, and Inclusion will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
Today's hearing is entitled, ``Putting the `Stable' in
`Stablecoins': How Legislation Will Help Stablecoins Achieve
Their Purpose.''
The Chair notes that votes are expected at 10:10, and it is
only one vote, so we will adjourn for that vote, and then come
back and continue our work.
I will now recognize myself for 4 minutes to give an
opening statement.
I want to thank all of you for joining our second
stablecoin hearing in the new Subcommittee on Digital Assets,
Financial Technology, and Inclusion. And although this is only
the second stablecoin hearing for the subcommittee, Member-
level conversations have been going on since 2021, and the
committee has worked significantly with our Members on both
sides of the aisle and with the President's Working Group on
Financial Markets' report on stablecoins. Both sides of the
aisle have discussed key guideposts for an effective regulatory
framework for payment stablecoins, which were incorporated into
the stablecoin proposal in the last Congress, and into the two
proposals that were noticed for today's hearing.
For example, Treasury Under Secretary Liang made it clear
that any regulatory framework for stablecoins must have strict
requirements in place around reserves and capital to guard
against potential runs, so we included those requirements in
both of the proposals. The Under Secretary also made it clear
that disclosures and attestations are critical for creating
enhanced transparency among stablecoin issuers, and those were
included as well. To echo the Under Secretary, and the title of
today's hearing, we want stablecoins to be used as a payment
mechanism, which they really are not today. And also, the only
way we can do that is by passing the appropriate regulatory
framework legislation.
In 2022, we made extensive progress on bipartisan
stablecoin legislation, and we have continued to build on those
efforts by taking feedback from members and stakeholders, and
the legislation noticed today reflects that feedback. There are
clearly many areas where Members have different views, and you
can see that from the two proposals. But from my seat as
chairman of this subcommittee, I remain convinced that Members
on both sides of the aisle are actively working in good faith
to find agreement on these key points. We also agree on the
basic protections that must be included in any stablecoin
legislation--consumer investor protection--which is at the
heart of our bill.
So, I want to be clear that while we notice two different
legislative proposals today, we are not starting from scratch.
To do so would have ignored all of the effort that has been
made and the common ground that was found during the
negotiations on the previous proposal. In fact, Ranking Member
Waters' proposal is substantially similar to the September
draft that we noticed at the April hearing, apart from three
key changes. Not only that, but Republicans made the exact same
change in our proposal as well for one of those. So, while
there is still work to be done, and we should use today's
hearing to discuss those key areas, I want to emphasize that
the similarities between the two proposals are strong, and that
we are not that far apart.
Without action from Congress, however, offshore and opaque
projects will continue to thrive, and stablecoin issuers will
not feel confident to seek opportunities in the United States,
and to echo the hearing title, stablecoins will not be stable.
Thus, opposing legislation is not a vote in favor of consumer
protection. Rather it is a vote for putting consumers at risk
by allowing a regulatory environment that pushes stablecoins
further away from appropriate U.S. regulatory oversight. We
have the power to reverse this trend and cement the U.S. as the
leading place for safe payments innovation.
I look forward to the discussion today. I look forward to
hearing our witnesses' views on the two proposals, and to
ultimately bringing legal clarity and consumer protection to
the stablecoin ecosystem.
And with that, I now recognize the ranking member of the
subcommittee, Mr. Lynch of Massachusetts, for 4 minutes.
Mr. Lynch. Thank you, Mr. Chairman, for holding this
hearing as we consider legislative options for regulating
stablecoins. I want to welcome all of the witnesses, and thank
you for attending to help this subcommittee with its work.
Last Congress, this committee came close to reaching a
bipartisan agreement led by then-Chair Waters. While the bill
was far from perfect, we had come to an agreement on some key
issues on stablecoins. Since then, however, much of the digital
assets space--including many stablecoin companies--has
collapsed. The recent bank failures have also taught us some
important lessons. It is clear that we need to ensure that
future legislation addresses the cracks that have deepened.
It appears that we have shifted further apart from a
bipartisan agreement and are now considering two different
pieces of proposed legislation. One is led by the Chair of the
Subcommittee, Chairman Hill, and the other by Ranking Member
Waters of the full Financial Services Committee. Ranking Member
Waters' bill and Mr. Hill's bill each address different issues
with stablecoins, taking various approaches. My hope is that we
can use this hearing to further discussion and to find some
alignment.
My concern with stablecoins remains the same as the last
time we held the hearing on this topic: stablecoin issuers
claiming their products are pegged to reserve assets and used
for the purpose of payments when we know that is not correct.
Eighty percent of stablecoin volume is dedicated to
facilitating the trading of cryptocurrencies and are instead
used as speculative instruments. I also continue to worry that
the stablecoins contain structural fragilities that make them
vulnerable to runs and pose risks to monetary policy, national
security, and financial stability. As we consider the recent
bank failures and threats to economic stability, we need to
ensure that any proposal provides adequate safeguards to our
financial system.
I do acknowledge and appreciate that my Republican
colleagues have attempted to address some of those issues that
we raised last time, such as disallowing non-bank issuer access
to Federal Reserve services, including master accounts and
access to the discount window. However, I still have concerns
about custody, the lack of acknowledgement of the SEC as
primary regulator, a lack of adequate consumer protection, and
the removal of exploration of a central bank digital currency
(CBDC).
Ranking Member Waters' bill gets us a step closer to
addressing some of those newer issues that have emerged. For
example, Ms. Waters' bill includes specific rules that require
issuers to protect assets they hold in custody from customers
and restricts the commingling of customer and company assets.
There are still a number of outstanding questions and
issues I would like to address. We need to reach an agreement
on the role of the States and of Federal regulators. I have
concerns about giving sole authority to States, because it
risks the possibility of States engaging in a race to the
bottom, and crypto companies seeking out jurisdictions with the
weakest regulation, which has been their practice.
I am going to take all 5 minutes, Mr. Chairman.
Chairman Hill. Sure.
Mr. Lynch. Yes. This also creates a moral hazard for
States wishing to attract crypto businesses. I believe it is
also important that all regulators weigh in and have a specific
role. We should ensure that there is alignment between the
Administration and financial regulators, and there needs to be
a specific role for the SEC and for the Consumer Financial
Protection Bureau (CFPB). While I understand there is some
agreement to allow non-bank companies to issue stablecoins, I
continue to have major concerns about access to deposit
insurance.
We must consider the lessons we have learned in recent
months regarding bank runs and losses. I must also reiterate
the need to separate digital assets from our banking system to
avoid the risk of exposure to our banking core. I am confident
that through discussions and input from regulators, advocates,
and banking experts, we can find alignment to address many of
the issues I have mentioned. Mr. Chairman, I yield back the
balance of my time.
Chairman Hill. The ranking member yields back.
We now welcome the testimony of our witnesses. First, Mr.
Matt Homer. Mr. Homer is the managing member of The Department
of XYZ, an early-stage venture capital firm focusing on
blockchain. He is also the former executive deputy
superintendent for research and innovation at the New York
State Department of Financial Services.
Second, Mr. Robert Morgan. Mr. Morgan is the CEO of the
USDF Consortium, an association of insured depository
institutions working to build a blockchain network to support
interoperable bank minute tokenized deposits.
Third, Mr. David Portilla. Mr. Portilla is a partner at
Davis Polk & Wardwell, where he specializes in a range of
policy matters related to financial institutions.
Fourth, Ms. Fennie Wang. Ms. Wang is the founder and CEO of
Humanity Cash, which helped launch the community stablecoin in
Berkshire County, Massachusetts.
And finally, Ms. Delicia Reynolds Hand. Ms. Hand is the
director of financial fairness at Consumer Reports.
We thank each of you for taking the time to join us today.
Each of you will be recognized for 5 minutes to give an oral
presentation of your testimony. And without objection, each of
your written statements will be made a part of the record.
Mr. Homer, you are now recognized for 5 minutes.
STATEMENT OF MATTHEW HOMER, MANAGING MEMBER, THE DEPARTMENT OF
XYZ, AND FORMER EXECUTIVE DEPUTY SUPERINTENDENT FOR RESEARCH &
INNOVATION, NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES
(NYDFS)
Mr. Homer. Good morning, Subcommittee Chairman Hill,
Subcommittee Ranking Member Lynch, and members of the
subcommittee, and thank you for the opportunity to participate
in this hearing. My name is Matt Homer. I was previously the
executive deputy superintendent for research and innovation at
the New York State Department of Financial Services (NYDFS),
where my responsibilities included overseeing the Department's
licensing supervision and examination of digital asset-related
companies. Earlier in my career, I was a Federal bank regulator
in the FDIC's Division of Depositor and Consumer Protection.
And today, I am an investor advisor to startup companies, and
the managing member of The Department of XYZ, a venture capital
firm that invests in early-stage companies building the next
generation of financial systems.
I first became familiar with stablecoins through my
experience regulating these products at the NYDFS. As this
committee is aware from prior testimony, New York State was one
of the first jurisdictions in the world to regulate the digital
asset space generally, as well as stablecoins specifically. My
experience as a regulator taught me that fiat-backed
stablecoins represent an important but incremental improvement
in the concept of money. In some ways, stablecoins are not so
different from the stored-value products many people already
use and are familiar with, such as gift cards or prepaid cards.
The question of how to effectively regulate stablecoins has
a more clear and straightforward answer than one may find in
considering how to regulate other parts of the digital asset
ecosystem. New York's experience shows that it is possible to
effectively regulate stablecoins using common sense and time-
tested regulatory practices.
For example, New York's regulatory framework for
stablecoins includes three major prongs: first, reserve
requirements to ensure the assets backing stablecoins are held
on a segregated basis on behalf of customers, are fully
reserved on a one-to-one basis, and are comprised of cash
deposits or other cash equivalents; second, redemption rights,
ensuring that stablecoin users have the right to redeem their
stablecoins on a one-to-one basis for U.S. dollars in a timely
manner; and third, public transparency requirements, including
monthly attestations from independent CPAs. The stablecoin
issuers covered by these standards are also subject to robust
supervision and examinations.
I believe there are eight important principles that should
guide legislation on this topic and help payment stablecoins
achieve their promise. I will discuss three of these for which
my background offers unique insight.
First, stablecoin legislation and implementing regulation
should recognize the dual banking system as an inherent feature
of the American economy that benefits consumers, innovators,
and markets. The parallel system of State and Federal
regulations supports economic growth by providing innovators
and founders optionality that can reduce barriers to launching
new products on a small scale, before rolling them out at a
national scale. It benefits consumers by providing access to
financial services tailored to local needs, and protects them
because States are able to move more quickly to fill regulatory
gaps.
Finally, it benefits markets by encouraging healthy
competition. The legislative drafts I have seen preserve this
dynamic. It would establish a Federal floor in the form of a
national standard, but would allow States to license and
supervise stablecoin issuers and set even tougher rules within
their own jurisdictions.
Second, stablecoin legislation should promote competition
and the competitiveness of the U.S. system. The stablecoin
market so far has trended toward oligopoly. Today, two issuers
alone make up over 80 percent of the market for U.S. dollar-
denominated stablecoins. Legislation should promote competition
by providing pathways for new players to enter the space and
challenge incumbents. One idea would be to create a safe harbor
for new entrants to test new products or services at limited
scale, and with limited customers, before requiring
comprehensive regulation, in order to expand to the general
public at greater scale.
I would also like to touch on competitiveness as a distinct
concept from competition. It is in the American interest to
ensure that issuers of U.S. dollar-backed stablecoins remain in
the U.S. so that we can regulate stablecoins on our own terms.
One way to promote this objective would be to add
competitiveness to the official mandates of Federal regulators
and to the set of criteria to be used by Federal regulators
when considering whether to license a stablecoin issuer.
Third, regulatory capabilities need to keep pace with
developments in the market. One of the aspects of regulating
digital assets that most intrigued me when I was at NYDFS is
the possibility of supervising the space more effectively using
digital tools and technologies. For example, I previously
mentioned monthly attestations of stablecoin reserves, but we
could conceivably move towards more real-time or near real-time
dashboards that provide insight into the backing assets of a
stablecoin, or even into the financial condition of the entire
issuing firm at any given moment in time.
I want to thank you again for the opportunity to be here,
and I look forward to your questions.
[The prepared statement of Mr. Homer can be found on page
41 of the appendix.]
Chairman Hill. The gentleman yields back.
Mr. Morgan, you are now recognized for 5 minutes.
STATEMENT OF ROBERT MORGAN, CEO, USDF CONSORTIUM
Mr. Morgan. Chairman Hill, Ranking Member Lynch, and
members of the subcommittee, thank you for the opportunity to
join you to represent the USDF Consortium and our member banks.
My name is Rob Morgan, and I am the CEO of the USDF Consortium,
which represents a group of community, mid-sized, and regional
banks that have come together to build blockchain
infrastructure for the responsible delivery of traditional
banking services.
Today's hearing comes at a critical moment. Distributed
ledgers hold tremendous promise to improve financial services
by offering faster, cheaper, and more-efficient products that
can help promote financial inclusion, drive growth in our
communities, and support the role of the U.S. dollar as the
global reserve currency. To date, most blockchain innovation
has occurred outside of the regulated banking sector, in novel
cryptocurrency markets. These markets have provided testing
grounds that have proven the efficiency and stability that
blockchain technology can deliver.
However, financial services only deliver value when they
facilitate real-world activity, such as helping small
businesses invest and grow, or helping families purchase a
home. To leverage blockchain for real-world transactions, you
first need a trusted form of digital money that exists natively
on blockchain. This is what led to the rise of stablecoins and
has driven the policy discussion around the creation of a
central bank digital currency (CBDC). The debate on how to
digitize the dollar is too often pitched as a binary choice
between these two options. We believe there is a third path
that leverages the way money already exists in our economy.
The U.S. dollar is already largely digital and exists
primarily in the form of bank deposits. Today, bank deposits
represent 73 percent of money in our economy. At its core,
blockchain is a ledger technology. Banks have long relied on
ledgers to record value and facilitate transactions. Over the
years, this technology has evolved from paper-based ledgers, to
on-premise servers, and now the cloud. We believe that
blockchain is the next evolution in ledger technology. By
recording a traditional bank deposit on blockchain, we can
bring many of the benefits of stablecoins to the real economy
while maintaining the numerous benefits and protections that
our two-tier banking system provides today.
Unlike stablecoins, tokenized deposits are not designed to
connect the broader crypto ecosystem to the real world.
Tokenized deposits are backend technology designed to improve
the delivery of traditional banking services. They will not
trade on exchanges, and in many cases will not be held directly
by the public. Like all bank deposits, they are a liability of
an insured depository institution.
Bank deposits are a cornerstone of our monetary and
financial systems that support the dominance of the U.S. dollar
around the world. They play a critical role in supporting a
bank's ability to lend into the communities they serve, driving
economic growth, and promoting social mobility. The value of
bank deposits is supported by stringent regulation and
proactive oversight, which includes capital and liquidity
requirements as well as technology risk management designed to
control for the risks associated with deposit taking.
Tokenizing deposits facilitates the creation of a real-time
blockchain-based payments infrastructure that can significantly
improve the delivery of banking services. It can facilitate
faster, cheaper payments, programmable payments, and atomic
settlement. We can only realize these benefits when innovation
is delivered responsibly and regulatory guidelines are clear,
certain, and consistently applied.
Legislation like that being discussed today is an important
step to ensuring stablecoins are delivered responsibly and that
consumers remain protected. It is important that these efforts
do not inhibit the adoption of blockchain for other
applications like tokenized deposits. To that end, we were
pleased to see that the draft legislation makes the critical
distinction between stablecoins and tokenized deposits, and
that it affirms a bank's ability to leverage blockchain for
traditional banking applications.
Unfortunately, there is not currently a clear regulatory
path for banks to adopt blockchain. Today, banks require formal
regulatory approval for any such project. We would encourage
Congress to work with the banking agencies to ensure there is a
clear and credible path for banks to adopt blockchain
technology. Competition breeds innovation, and we believe there
is a role for many forms of money, both novel and traditional.
We look forward to working with Congress to ensure there is an
appropriate regulatory framework for novel assets like
stablecoins, and to ensure there is regulatory clarity for
banks to adopt new technologies that benefit the customers and
communities that they serve.
Thank you for the opportunity to testify today. I would be
happy to answer any questions you may have.
[The prepared statement of Mr. Morgan can be found on page
49 of the appendix.]
Chairman Hill. Thank you, sir.
Mr. Portilla, you are now recognized for 5 minutes for your
oral presentation.
STATEMENT OF DAVID L. PORTILLA, PARTNER, DAVIS POLK & WARDWELL
LLP
Mr. Portilla. Thank you, Chairman Hill, Ranking Member
Lynch, and members of the subcommittee. It is a pleasure to
have the opportunity to speak before you today. I commend all
of your diligent efforts and the progress that has been made to
develop stablecoin legislation. I believe a bipartisan
substantive consensus should be achievable.
These types of financial products are special because they
pose well-known risks, such as the risk of a run, that is,
request for redemption and loss that cannot be met due to a
mismatch in the liquidity of reserve assets. We can and should
proactively mitigate these risks by establishing a regulatory
framework now before the risks grow larger and scale makes that
change more difficult.
I cannot say with certainty whether stablecoins represent a
part of the future of payments, yet I feel quite confident that
the current legal framework is ill-suited to comprehensively
regulate payment stablecoins. Correspondingly, legislation that
enables fit-for-purpose regulation would help foster an
environment where this technology can develop and scale.
Some of the potential that payment stablecoins offer
include the programmability of money and additional means for
mobile-based, real-time payments for consumers, and the
creation of an additional payments infrastructure in which
further innovation can occur. If realized, all of these
developments may amplify the potential for building a more
efficient, competitive, and resilient payment system.
Legislation should establish privileges and
responsibilities along a spectrum. Greater privileges from the
government should be coupled with more-stringent regulatory
oversight; a more-tailored regulatory approach, on the other
hand, should be coupled with appropriately-calibrated
privileges from the government.
The remainder of my remarks will focus on what I believe
are the key outstanding issues that should be addressed in any
legislation.
One, who should be permitted to issue payment stablecoins?
Nonbanks should be permitted to issue payment stablecoins.
Within a banking organization, it makes the most sense for a
stablecoin to be issued by a non-bank entity within the
corporate group. The reason is that the common conception of a
payment stablecoin business, the issuance and redemption of an
instrument backed by a discrete pool of high-quality liquid
assets, is distinct from the traditional banking business
model.
Two, who should regulate payment stablecoins? Federal
regulation of stablecoin issuers would offer more uniform,
consistent rules, where a State regulation could promote more
diversity and innovation in regulation and supervision. The
answer to this question need not be binary. Many of the
legislative proposals released by Members of Congress to date
have followed the model of our dual banking system. that is,
they would establish a framework in which stablecoin issuers
could be regulated either directly at the Federal level, or
primarily at the State level with an overlay of Federal
oversight. There are many options, including providing Federal
regulation as a backup to State regulation, or an approach that
toggles based on the scale of an issuer.
Three, should non-bank payments stablecoin issuers be
provided access to the Federal Reserve's payment system or
discount window? Granting non-bank payment stablecoin issuers
access to master accounts could help them provide more-
efficient services to their customers. Perhaps legislation
could grant non-bank stablecoin issuers access to Federal
Reserve Bank services, but limiting those services in both
scale and scope, or access to Federal Reserve Bank services
could be available as an option or based on the scale of an
issuer.
Four, to what extent, if at all, should payment stablecoins
be subject to, ``deposit insurance?'' Whether some form of
insurance is ultimately needed for stablecoins may turn on the
nature of the reserves that backed them, and relatedly, the
degree to which consumers expect their stablecoins to be
redeemable on demand at par.
Five, what insolvency standard should be applicable to
payment stablecoins? To the extent payment stablecoins are
designed or perceived to be effectively free of credit risk, it
would be prudent to provide stablecoin holders with structural
priority over an issuer's other creditors. In addition,
customers should know that the companies that help them hold
stablecoins do so in a safe way. Existing Federal and State
laws provide standards for custodians and should be useful in
this context.
Six, what other legal regimes should apply to payment
stablecoins and related products and services? Well, I focused
primarily on prudential issues. Payment stablecoins and related
products also present other common regulatory concerns such as
those related to consumer protection and illicit finance. All
of these considerations should be thoughtfully explored, but
this does not mean that the securities laws should apply to
payment stablecoins nor does it mean that we should be vexed to
paralysis in trying to answer questions that, frankly, permeate
traditional finance, such as how to regulate any service
provider that is adjacent to a regulated firm. Ultimately,
consumers in our financial system more broadly will be best-
served by focusing on the issues I outlined, where I believe we
can find common ground.
Thank you.
[The prepared statement of Mr. Portilla can be found on
page 59 of the appendix.]
Chairman Hill. Thank you, sir.
Ms. Wang, you are recognized for 5 minutes for your oral
presentation.
STATEMENT OF FENNIE WANG, FOUNDER AND CEO, HUMANITY CASH
Ms. Wang. Good morning. Thank you, Chairman McHenry,
Chairman Hill, and Ranking Members Lynch and Waters for giving
me this opportunity to testify.
People like me rarely have this opportunity. I do not
represent a large corporation or an industry organization. I am
an independent lawyer and entrepreneur working with grassroots
organizations. While in my past life, I have worked for a Wall
Street bank and Wall Street law firms, the work I do now is a
labor of love, working with community organizations to design
local currencies that make money work harder for local
communities. Indeed, my company is called, ``Humanity Cash,''
because we want to make money personal again.
During the pandemic, I studied the history of community
currencies, which are not legal tender, but they complement
national currencies as a local medium of exchange to ensure
more money circulates and stays within local communities. In
the United States, where we enjoy the world's reserve currency,
one downside is that the U.S. dollar sometimes works minimally
for local communities, with most of that money benefiting big
banks and large corporations. Therefore, the goal of a local
currency may be to promote patronage of small businesses and
local banks, which recirculate deposits back into the local
economy in the form of productive loans, creating a money
multiplier effect. This is the model of a local currency in The
Berkshires, Massachusetts.
During the pandemic, small businesses were under and
continue to be under pressure. The pandemic also accelerated
the shift towards contactless payments, which means that more
money is leaking out of local economies. Even if you shop
locally, if you pay with a credit card, the local economy loses
out on the money multiplier effect of that dollar being put to
work by local banks, as well as the 3- to 4-percent transaction
fees that are taken off the top. I saw this as an opportunity
to address a real-world problem for which blockchain was
suited. By digitizing a local currency, we can better compete
with credit cards, and reduce transaction fees, while ensuring
that the underlying dollar reserves remain deposited and,
therefore, invested in the local economy via local banks.
During the process of designing and launching additional
local currency, I interviewed small business owners, community
bankers, and ordinary citizens, whether in The Berkshires or
across the United States, from Puerto Rico to Hawaii to
Indiana. The people I have met are not interested in crypto as
a speculative investment, and neither is anyone in this room.
We are all deeply passionate about making money work for our
communities--that, ``we,'' includes a concrete mixer driver, a
retired accountant, community organizers who support Black-
owned businesses, and a small business owner who produces
Massachusetts-made ukuleles.
As grassroots entrepreneurs and community innovators, we
need risk-appropriate regulations that will not be cost-
prohibitive, while providing guardrails to protect us from bad
actors. Chairman McHenry's stablecoin proposal strikes a good
balance between these two needs. Importantly, it provides space
for local initiatives in innovation through State regulators in
a clear roadmap for implementation. This proposal also provides
the groundwork for community financial institutions as well as
non-bank institutions, such as Economic Development
Organizations, to staunch the flight of deposits from local
communities.
Payment stablecoins enable higher-quality deposits, as we
can transact amongst each other without needing to withdraw the
underlying dollars. The urgency of keeping deposits local is
more important than ever in light of the regional banking
crisis. The community banks we work with in Massachusetts
recirculate 70 cents of every dollar back into the local
economy, compared to just 20 cents for large banks.
Long term, blockchain technology can replace outdated
banking and payments infrastructure, which is currently
limiting the ability of smaller banks to innovate and compete
effectively against big banks and fintechs. With the right
policies, starting with the stablecoin proposals, we can enable
our financial system to be more competitive and more responsive
to local economies, a benefit that ordinary Americans deeply
desire. Thank you.
[The prepared statement of Ms. Wang can be found on page 67
of the appendix.]
Chairman Hill. Ms. Reynolds Hand, you are now recognized
for 5 minutes for your oral presentation.
STATEMENT OF DELICIA REYNOLDS HAND, DIRECTOR, FINANCIAL
FAIRNESS, CONSUMER REPORTS
Ms. Hand. Thank you. Good morning, Chairman McHenry,
Ranking Member Waters, Subcommittee Chairman Hill, Subcommittee
Ranking Member Lynch, and members of the subcommittee, and
thank you for this invitation to testify. My name is Delicia
Reynolds Hand, and I serve as the director of financial
fairness at Consumer Reports, where I lead the organization's
work in digital finance. At Consumer Reports, we examine what
fintech products and services actually do for consumers and how
they rate alongside each other. Do they actually live up to
what they promise?
As I testified recently, the convergence of new
technologies and new forms of assets have made cryptocurrencies
particularly appealing for consumers whom traditional finance
has never appropriately served. In a volatile and stressed
economic environment, consumers and investors are at an even
greater risk in the absence of rules and noncompliance with
regulations to protect them and prevent the misuse or
exploitation of these assets. Since the last conversation on
stablecoins, Europe has succeeded in bringing crypto assets,
crypto asset issuers, and crypto assets service providers under
a regulatory framework, and today, we have two bills under
consideration. I hope we can land in a good place for
consumers.
Consumer Reports urges this committee to work together to
achieve effective and comprehensive regulation of stablecoins.
This is especially important for responsible innovation,
financial stability, and financial inclusion. Appropriate
regulation, supervision, and oversight needs to be implemented
before stablecoins become a greater risk to financial
stability, safety, and soundness, and the smooth functioning of
payment system.
To be clear, this space will be regulated, and new
frameworks will be developed. The question is, whether the
development will be driven by crisis or collaboration? We
support updates to the committee draft which include Federal
regulatory review to ensure the safety and soundness of
stablecoin issuers. And we encourage the adoption of provisions
in the bill granting the Federal Reserve Board authority to
reject State licenses. Not including these provisions creates
regulatory arbitrage, which could drive a race to the bottom
instead of a race to the top. These are lessons we have failed
to learn from the past. Keeping with the tradition of
congressional implication of the commerce clause, the law
should be the same across all 50 States.
The committee draft could also go further to include
specific key requirements which parallel requirements for
traditional banking. While both drafts retain some equivalent
requirements to provide information about the organizers,
senior management teams, and capital adequacy, we urge the
committee to also retain requirements to promote diversity and
inclusion in the compromise bill. We support the addition of
requirements for Federal regulators to issue rules related to
risk management infrastructure.
Second, while the committee bill outlines a role for
Federal oversight, it does not require entities that become
stablecoin issuers to be insured depository institutions. The
compromise bill, however, makes it clear that issuers shall not
represent stablecoins as insured depositors. We would encourage
adoption of this language. We are most concerned about the
removal of key text in the committee draft, maintaining
separation of banking and commerce, prohibiting non-financial
commercial businesses like Facebook or Walmart from owning a
payment stablecoin issuer. Additionally, we would encourage the
adoption of stronger consumer protections.
The bill sets up a regime to prove issuers of payment
stablecoins, but it doesn't outline adequate consumer
protections for payment activities conducted or facilitated by
issuers or their coins. We urge the committee to move forward
with the provisions in the compromise bill that require
stablecoin payment regulation to additionally be technology-
neutral, to promote interoperability and to ensure stablecoin
arrangements share common features with the traditional
financial system.
We also request that the committee adopt language
associated with strong oversight of custodial wallets, as the
committee draft does not cover all assets held by custodial
wallets. We do not need another Lehman Brothers. And in the
event of another insolvency, a bankruptcy court could
reasonably view, as they have in Celsius, that commingled funds
are grounds for giving the company and its creditors priority
access to those funds rather than stablecoin holders, the
rightful owners. Lastly, we urge explicit clarification on how
and when the SEC can and should regulate in this space.
Thank you again for the opportunity to testify.
[The prepared statement of Ms. Hand can be found on page 36
of the appendix.]
Chairman Hill. Thank you for your testimony. And we
appreciate all of the testimony from our witnesses. We will now
turn to Member questions.
The Chair recognizes himself for 5 minutes.
Mr. Homer, those were interesting comments you made about
validation of the reserves for a stablecoin, and you referenced
the ability to do that on an intraday basis versus the way the
bill is drafted. Is that technology readily available for a
stablecoin issuer to provide an intraday valuation of their
reserves and transparency on that?
Mr. Homer. Thank you for the question, and, yes, the
technology is available. I think there will be two aspects of
it. One is the number of stablecoins that you have issued,
which is available publicly through the blockchain, and then,
the second aspect of it would be technology to show that the
backing assets match that on a one-to-one basis. And both of
those things can be accomplished,
Chairman Hill. Right. And that would obviously be backed
up by the attestation and monthly financial reporting, and then
audits. Yes. Thank you. That is a good comment you made.
In our last hearing, we heard testimony from NYDFS
Superintendent Harris on the role of State regulators. She
described how State regulators can regulate payments,
stablecoin issuers, and how a regulatory regime could be built
on a well-established dual banking system that we have in our
country. I think it is important as we work through the drafts
that we strike the right balance there. I think it is a key,
effectively, a difference between these two drafts, and the one
that we are going to try to figure out between both sides of
the aisle as we work through this. And naturally, it is an area
that the Federal Reserve cares a lot about since they would be
the primary regulator for federally-qualified nonbanks. And in
our Republican draft, we have the Comptroller of the Currency
as the primary Federal regulator for national trusts.
Our September bill, from last fall, the Maxine Waters-
Patrick McHenry bill, would require a State-chartered issuer
also registered with the Fed.
Mr. Homer, striking a balance there, what is your view on
making sure we get that balance right?
Mr. Homer. Yes. As you pointed out, I think that balance
is very important to get right for a number of reasons, most
importantly, that we want a competitive marketplace. I have
been a Federal regulator, and I have been a State regulator,
and I think both regulatory systems are important to the
stability of our financial system. But I will say with
certainty that State regulators are much closer to the ground.
They know their local constituents much better. They are much
more able to effectively calibrate a regulatory environment
that meets local requirements. The State pathway is important,
because if you are someone who is starting a financial services
company, that is where you go to get licensed or chartered for
the first time.
Chairman Hill. But you know the ranking member's concerns
about a race to the bottom, right? You have been a State
regulator and an FDIC employee. Can we strike that balance with
the way we have approached it in the Republican bill, do you
think?
Mr. Homer. I think so. I think in both of these bills,
there is a strong Federal floor. I would argue that a race to
the bottom is not possible.
Chairman Hill. Okay. Good. Thank you.
Let me turn to you, Mr. Portilla, on the issue of the OCC
charters. The Comptroller of the Currency had two digital asset
firms that they had given conditional approval to act as a
trust. And those conditional approvals now have lapsed, like so
many things, around our lack of a regulatory framework, adding
to the frustration here. The Republicans on the subcommittee
sent a letter to the Agency pointing out its inconsistent
approach in reviewing national trust bank charter applications.
Could you discuss the benefits of allowing the OCC to serve as
the primary regulator for any stablecoin issuers that receive
an OCC national trust charter, please?
Mr. Portilla. Yes. Thank you for the question. I think the
main benefit of having the OCC serve as the primary Federal
regulator for a stablecoin issuer that has a national trust
charter is that you avoid multiple Federal regulators of the
same entity. And in addition, the OCC is at heart a supervisor
and an examiner of banks and trust companies, and so they are
well-qualified to do that.
Chairman Hill. That is helpful. Let me yield back the
balance of my time, and call on my friend from Massachusetts,
the ranking member of the subcommittee, Mr. Lynch, for his 5
minutes of questions.
Mr. Lynch. Thank you, Mr. Chairman. Mr. Homer, how many
stablecoins are registered in New York State?
Mr. Homer. There are, I believe, currently three companies
that have been chartered to issue--
Mr. Lynch. How many stablecoins are there?
Mr. Homer. I believe it is five.
Mr. Lynch. No, no. How many stablecoins are in existence
right now?
Mr. Homer. There are probably--
Mr. Lynch. 20,000, I think, yes.
Mr. Homer. That would claim they are stablecoins.
Mr. Lynch. Yes. So, 5 out of 20,000 are registered in New
York. I think that is evidence of a race to the bottom right
there, where stablecoins are trying to and crypto companies are
trying to go to the areas with the least amount of regulation.
I also worry, and I know you have done extensive work in New
York. We had Ms. Harris in yesterday, and I know people have
done a lot of good work in New York around this issue.
But the practice--a race to the bottom is not possible. A
race to the bottom is the practice, is the custom of this
industry, to go offshore and seek areas of least regulation. I
compliment the State of New York for the work that they have
done. However, my feeling is that if we directed this to the 50
States and the Territories, perhaps that practice would
continue, and cryptocurrencies would seek out those areas,
those jurisdictions that offer the best opportunity for them to
maximize their profit and avoid cumbersome and costly
regulation and disclosure. That is what I worry about here,
that we are not engaged in that type of practice where New York
would be penalized for having a robust regulatory system. They
would run elsewhere. There are other States that are in the
game here. We all know who they are, that are offering
themselves as safe havens, that offer us some real concerns.
But anyway, I do appreciate you all being here and helping
us. This is a learning process, and we are all trying to
understand this in a better way so that we can craft this
legislation and come to a meeting of the minds. I deeply
respect the chairman, Mr. Hill, and I know he is a good man,
and we are trying to get to a good situation on this. But, Ms.
Reynolds Hand, back in February of this year, the Fed Board of
Governors offered guidance on member banks regarding the use of
digital assets within the Federal banking ecosystem, and they
said they are offering this guidance because of rampant fraud.
The rule that they promulgated covered two directives. One
was to presumptively prohibit holding crypto assets out of
safety and soundness concerns, and the rule also noted
significant risks associated with the cryptocurrency sector,
including fraud, legal ambiguity and volatility. They also
said--and this really got me--that in the absence of a
fundamental use case, the value of most crypto assets is driven
largely by sentiment and future expectations, and not by cash
flows from providing goods or services outside the crypto asset
ecosystem.
So in light of so many of these stablecoins breaking the
buck, becoming de-pegged, wreaking havoc for those who hold
this because of the inability of depositors and investors to
get their money back in redemption, is this something that we
want to tie to a traditional financial system and give access
to the Federal Reserve discount window or access to Federal
Reserve services?
Ms. Hand. I would say we certainly shouldn't start there,
with so much volatility and disruption occurring. We shouldn't
open up the Federal purse, frankly, until industries are proven
to be safe and we cut down on rampant fraud and other abuses.
We should start first with clear rules of the road and strong
protections for consumers. Then, once proven, we should add the
additional programs in which companies are interested.
Mr. Lynch. That is great. Thank you. Mr. Chairman, I yield
back.
Chairman Hill. The ranking member yields back.
I now recognize Mr. Davidson of Ohio, who is the vice
chairman of this subcommittee, and the chairman of our Housing
and Insurance Subcommittee, for 5 minutes.
Mr. Davidson. I thank the chairman. Thanks for our
witnesses, and, frankly, for the colleagues who are here to
help make good policy. I will try to stay calm and measured in
my responses here. But the whole point that we are trying to do
is provide a clear legal framework for the entire country so
that no one State can game the system or, frankly, so that
people aren't driven offshore, out of our capital markets and
our regulatory framework. Often, they are fleeing our markets
to find certainty, so it would be great if we would provide
some. I have been working on this for a long time, as have many
of you.
Speaking of efforts, people say, oh, there is a lack of
stability, that a lot of the same people are working to create
a lack of stability.
Mr. Homer, this year it has become fairly apparent to many
people in a bipartisan way that the traditional banking
industry has started taking a hostile position with digital
asset companies in the space in which they operate. When
Silicon Valley Bank failed, some people pointed to digital
asset companies, one of which was a stablecoin issue, and said
they held too much of their capital at one bank, Silicon Valley
Bank. When Signature Bank failed, people claimed that maybe it
had something to do with digital assets.
Barney Frank, a former chairman of this committee, said it
didn't have anything to do with that. The director of the New
York State Department of Financial Services, who was there for
the whole thing, said it didn't have anything to do with
digital assets. So, where are they going to go for banking?
Could you speak to the harm that comes with deep banking, the
industry, and the damage, and, frankly, the lack of stability
that it has caused?
Mr. Homer. Yes. Thank you for the question. I think it is
something that has been a challenge, and it has become much
more difficult for companies in the space to find banking
services, even for the most basic of services, to find an
account for payroll, for example. I think, unfortunately, what
that will lead to is people looking for alternatives that are,
in some instances, offshore.
Mr. Davidson. If you can't deposit your cash in America,
you are probably going to deposit your cash somewhere, right?
Mr. Homer. Right.
Mr. Davidson. So then, they will point to that and say,
see, they are offshore. Well, you drove them there, on purpose,
I might add. Let me just address this. Could a stablecoin go to
zero, a regulated stablecoin that is backed by high-quality
liquid assets, or, frankly, commodities, physical custody of
commodities, would that really go to zero?
Mr. Homer. Under this proposal, it would be very difficult
to foresee a scenario.
Mr. Davidson. There would have to be complete fraud. They
didn't have the assets, right? Could somebody in that case,
where you had full custody of the assets that you say you have,
whether they are level-one, high-quality assets or physical
custody of a commodity that backs it, could it possibly go to
less than the value unless there was actual fraud?
Mr. Homer. It would be very difficult.
Mr. Davidson. I think that is the case, and that is the
whole goal of the regulatory regime we are trying to put in
place here with stablecoins. As we confront the debt ceiling
and the fact that this town spends way more money than we
collect in revenue for a long, long period of time, we are
spending more money than anyone will even lend us, there seems
to be a shortage of demand for Treasuries, given that the most
frequent backing for a stablecoin so that it really is fully
backed is Treasuries.
Mr. Portilla, could you talk about the important linkage
that stablecoins would create for demand for U.S. dollar-
denominated Treasuries?
Mr. Portilla. Right, yes. Thank you for the question. I
think you are right. If stablecoins are required to hold their
reserves and high-quality liquid assets, which of course
includes short-term Treasuries, there would inherently be
increased demand for those assets from those issuers. So, I
think that is right.
Mr. Davidson. Yes. I think it could actually help us solve
a number of problems. And then the last thing in terms of the
payment space, frankly, for a lot of people, is they look at a
stablecoin as in many ways superior to a fiat currency, because
while the fiat currency is backed by the full faith and credit
of the United States, and we could just print more money, you
have a hard time guaranteeing that it will buy the same amount
of goods. But in the case of a stablecoin, it is fully backed
and could be backed by physical custody of assets as well.
My time has expired. I hope we land on something in a
completely bipartisan way and that we can get this done. I
yield back.
Chairman Hill. I thank the gentleman. Mr. Foster, who is
the ranking member on our Financial Institutions and Monetary
Policy Subcommittee, is now recognized for 5 minutes.
Mr. Foster. Thank you. Mr. Homer, you mentioned real-time
monitoring of reserve balances versus tokens issued. Wouldn't
it be actually easiest and safest to simply require as part of
the minting process that digital attestation for the Federal
Reserve, that the amount of deposit in the relevant account at
the Fed exceeds the amount of tokens that are proposed to be in
circulation following any proposed minting operation? So
basically, that any proposed minting operation would not be
cryptographically valid until it was accompanied by a Fed
attestation that the assets are actually there on reserve. Do
you understand where I am going? It seems like this is a very
unburdensome operation to require for both the Fed and the
issuer.
Mr. Homer. I think they could be complementary. If we are
thinking about trust in the market and how do we produce trust,
I think real-time dashboards could assist with that. But of
course, attestations from a regulator or required by a
regulator are important and probably not in addition to that. I
don't think they are mutually exclusive.
Mr. Foster. I am worried about the sort of abuses that we
saw with flash loans and things where even, for a fraction of a
second, you can have weird things happening, and all of a
sudden, a giant fraud has taken place, whereas if you would
have simply said the minting is not valid until the Federal
Reserve says, yes, they are there, before, during, and after
the minting operation, you have some excess buffer of reserves.
It seems like that should be an absolutely solid way of
guaranteeing.
Also, that approach, it seems to me, really eliminates all
of the worries about monetary effects, because there is a one-
to-one ratio in which you emphasize fraudulent issuance, runs
on stablecoins, and that would all just disappear if we adopted
that approach. So, I think there is a lot to be said for it.
Ms. Wang, in your testimony regarding Humanity Cash
projects, I see that you have kind of independently discovered
and implemented the two principles that I believe must be
included to have the controlled privacy and security that will
be needed to avoid fraudulent and criminal use of stablecoins.
First, in your testimony you state that the use of a
blockchain ledger can also cost-effectively and in transparency
meet part of the public reporting requirements under the
proposed stablecoin bill. For example, you can show in real
time that the number of tokens on a chain compared to the U.S.
dollar reserve balances is what we have just been talking
about.
But second, I was very pleased to see that you have also
attached what amounts to be automobile license plates on each
digital wallet, something that I have been advocating in this
committee for quite some time.
Then, in your testimony, you state that at the point of
wallet creation, we collect information regarding username and
contact information associated with each wallet, not available
to the public on a public ledger to preserve user
confidentiality, and then go on to explain why it would be to
the advantage of that system.
So, let us spend a moment looking through the privacy
implications of this to see if it is a comfortable place to
land. For example, if a person uses Humanity Cash to buy a
secret gift for their secret lover with no criminal activity
involved, can they expect that it will remain anonymous and
secret?
Ms. Wang. Yes. The blockchain itself doesn't show any
personal identifying information, but we can also design
systems that preserve the balance between preserving your
privacy versus law enforcement needs. One of the other areas
that I have done work on is around digital identity. You can,
for example, have the DMV or a bank issue a digital token that
represents like KYC credential, right? So, your identity
Mr. Foster. Yes. The so-called mobile ID or digital
driver's license?
Ms. Wang. Right. And a wallet can hold that digital
identity token to signal that it has been checked, and then,
you are going to have safe transactions without needing to
actually know who that person is, unless there was a compliance
reason to reveal the underlying information.
Mr. Foster. I know that. I am a huge fan of mobile ID as
well. Now, on the other hand, if there is a ransomware attack,
say attempting to use Humanity Cash as a payment and someone's
screen locks up and says that in order to decrypt your computer
files, we want you to transfer this much Humanity Cash to this
wallet, then I presume you can go to some judge somewhere,
prove a crime has been committed, and de-anonymize the owner of
that wallet. How does that take place? What is the mechanism
for control of de-anonymization?
Ms. Wang. In our specific case, I think the chances of
that are pretty low because you would only be able to suspend
it--
Mr. Foster. I understand, but we are talking about systems
at a scale.
Ms. Wang. Right, but at a systems level, there will be
ways to prevent that. Instead, you would know exactly where the
money has been transferred. But you can freeze, for example,
compromised tokens and so they would no longer be transactable
after the point of attack. And then, you still have the
underlying real-world assets, the deposits in the bank, and all
of that remains safe, so we can then--
Mr. Foster. Thank you. I think my time is up. Your project
may be small, but I think you have seen the future pretty
clearly.
Ms. Wang. Thank you.
Chairman Hill. Thank you, Dr. Foster. We now turn to the
gentleman from Tennessee, Mr. Rose, for 5 minutes.
Mr. Rose. Thank you, Chairman Hill and Ranking Member
Lynch, for holding this hearing, and thank you to all of our
witnesses for your time today. I would like to also thank the
chairman for noticing Ranking Member Waters' stablecoin draft
to this hearing to give us the opportunity to discuss some of
the bad policies that it includes. For instance, it would
require each stablecoin issuer to disclose so-called diversity
statistics, which have nothing to do with the financial
stability of the issuer. Additionally, the Waters draft
proposes to push forward with a study on a central bank digital
currency, which has been called the single greatest assault to
financial privacy since the creation of the Bank Secrecy Act.
Since my time is limited, I want to dive directly into my
questions. Mr. Morgan, the U.S. dollar is the world's reserve
currency, accepted all around the world because it is backed by
the full faith and credit of the U.S. Government. In that
sense, it is the original utility token. I see the value in
U.S.-based stablecoins to facilitate payments. So, Mr. Morgan,
if we are going to use blockchain technology and crypto rails
to facilitate payments, is it essential to have a less-volatile
asset, like a U.S.-backed stablecoin, than, say, Bitcoin or an
Ethereum-based token?
Mr. Morgan. Congressman, thank you for the question. We
think that stable asset is a critical piece of facilitating
real-world value. In particular, we believe tokenized deposits
are one path to do that. Today, bank deposits are 73 percent of
money in the U.S. economy. Stablecoins are separate and apart
from that, but we believe that competition from well-regulated
parties for the form of that money can only benefit the
economy.
Mr. Rose. Thank you.
Mr. Portilla, the McHenry bill does not include a
requirement for a report on financial inclusion, which was
included as part of an earlier draft. It also does not require
regulators to consider financial inclusion when evaluating a
stablecoin issuer's application, which is also required in the
earlier draft. Mr. Portilla, does information pertaining to
diversity and financial inclusion have any bearing on whether
the stablecoin issuer is capable of operating a stablecoin in a
safe and sound manner?
Mr. Portilla. Yes. Thank you for the question as well. No,
I think the safety and soundness factors in the proposed
legislation, both of the proposed pieces of legislation, are
different than what you might call the community benefit or the
financial inclusion standards. I think the financial inclusion
or community benefit standards are not going towards safety and
soundness. They are addressing other policy goals.
I think those are borrowed from our banking laws, where
those factors are required to be considered under the banking
statutes for mergers and acquisitions, for example, for
different reasons. For example, classic banking is taking
deposits and making mortgage loans, and Congress in the past
has worried about banks making decisions about whom they are
lending to. To me, that is not relevant to the business of a
stablecoin. They are not making those types of decisions. So, I
think there is a question of if that is the right piece of the
banking statutes to draw from for stablecoin legislation.
Mr. Rose. Thank you. I agree.
Mr. Morgan, tokenized deposits have a role to play in
utilizing the benefits of the blockchain in our payment
systems. Can you address the benefits of tokenized deposits and
how they differ from traditional stablecoins?
Mr. Morgan. Congressman, thank you for the question. We
believe that this is a critical distinction. Unlike
stablecoins, tokenized deposits are not designed to connect
that broader crypto ecosystem to the real world. Tokenized
deposits will not trade on exchanges, and in most cases, will
not be held by the general public. They are simply backend
infrastructure that can bring the innovations associated with
blockchain technology into the traditional banking space.
Mr. Rose. Thank you.
Mr. Homer, how do we ensure that stablecoin issuers work
with their regulator to utilize an appropriate amount of on-
balance sheet liquidity and concentration limits to offset the
risk of withdrawals in a stress scenario based on their risk
profiles?
Mr. Homer. Thank you, Congressman, for the question. It is
a great question, and it really speaks to the importance of a
prudential supervisor being the primary regulator of
stablecoins. And that is the balance the stablecoin issuers
have to strike, a balance between stability and liquidity, and
prudential supervisors have an important role to play there in
helping them think through scenario planning to get that right.
Mr. Rose. Thank you. I see my time is expiring, so I yield
back.
Chairman Hill. The gentleman yields back. The gentleman
from California, Mr. Sherman, is recognized for 5 minutes.
Mr. Sherman. I am here to channel Nancy Reagan. Just say
no to crypto and to so-called stablecoins, the biggest oxymoron
in the American language. Mr. Rose points out that the other
way to go here is with the digital dollar, and the reason he
opposes that is he wants to have financial privacy. That is
right. If you want to be a drug dealer, you need financial
privacy. If you want to evade our sanctions laws, you need
financial privacy. But the big market is the tax evaders. The
IRS has testified that we have a trillion dollars of
uncollected taxes, chiefly from billionaires, in this country.
That means they have to hide $3 trillion of income every year.
That is the big market for this.
I first got involved in crypto because it blows a giant
hole in what has been the most effective element of national
power, and that is our ability to impose sanctions. We differed
on the Iran nuclear deal, but we were able to order every
country in the world to not buy Iranian oil in excess of the
amount we specified for that country because of the role of the
U.S. dollar. Some would say that got us a great nuclear deal,
some would say it should have gotten us a better nuclear deal,
but if this works, we are not going to have that power anymore.
You can build a couple more aircraft carrier groups at great
expense, but it isn't going to give you the power that we had
at that time.
My concern is what happens if this works as a payment
system. It is designed to compete with the U.S. dollar. I think
Mr. Davidson had it right. Here in Congress, we spend money
like we are Democrats, we impose taxes like we are Republicans,
and we have a fiscal deficit that would make Argentina blush.
If we didn't have the U.S. dollar playing the role that it
does, our economy would be worse than that of Argentina, so if
this works, it is a problem. We have people here concerned with
either helping billionaires make money or maybe helping
consumers not get ripped off. All of the billionaires make the
money, but we don't have anybody on our panel concerned with
the power of the United States through its U.S. dollar.
Now, we have the McHenry bill, which allows you to go to
any one of the 50 States and make them your regulator. So, you
supposedly have one-to-one backing for your money, but you pick
your auditor out of any one of the 50, so it certainly gives
you the opportunity to have less oversight, and eventually not
to have support. Mr. Davidson points out that the inflation
means that the dollar is worth less. That doesn't mean these
stablecoins preserve value because these stablecoins are tied
to the value of the U.S. dollar. They are never worth more than
one-to-one. They can be worth less if you have fraud and you
invite fraud by saying, go to the State that has the least-
effective audits.
Finally, there is the use of private wallets. Now, those
who talk about fiat currencies will say, hey, I have a private
wallet. You can't conveniently put a million dollars in this.
The Federal Government doesn't regulate it, but how much money
can you put in it? In contrast, we are going to have a
stablecoin system that is like an iceberg. Some will be above
the water and will see it, but then you will have private
wallets below the water that will be a lot more efficient for
tax evaders, drug dealers, and sanctions evaders.
I can't believe I still have an additional 40 seconds.
I will also point out that this stablecoin is not some hip
new thing. It is as hip as John Quincy Adams. We already had
this in the 1820s. Banks would issue their own currency,
similar to what Ms. Wang was talking about. I want to add one
more thing, and that is, we already have money market funds.
They work much better than stablecoin as a payment system now,
and we can make them much better than they are now. You can tie
them to a debit card. The only problem is they have Know Your
Customer (KYC) rules, and that means they are not good for tax
evaders and sanction evaders. I yield back.
Chairman Hill. The gentleman yields back, and the Chair
reminds all Members that there is no loss of prestige by
yielding back in less than 5 minutes.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Steil, for 5 minutes.
Mr. Steil. Thank you very much, Mr. Chairman. Thanks for
holding today's hearing. I think it is a really important
topic.
Mr. Homer, one of the things I think a lot about is how we
make sure that the development of these products isn't
overseas, but rather, in the United States. A lot of times, I
think about the challenges that I have with Big Tech, but if I
look at all of the challenges that I have with Big Tech, I
think I can't even fathom to wrap my head around the challenges
that we would face if, instead of having U.S.-domiciled
companies at the forefront, if all of our Big Tech companies
were like TikTok and were developed outside the United States,
the challenges that we would face or the infancy in some ways
of this technological revolution.
I want to make sure it remains and is developed here in the
United States with our values rather than internationally, as
well as the jobs and value that will come from that. And so, as
I look at that, do you believe that the proposed McHenry
legislation will provide innovators with the certainty they
will need to invest here in the United States?
Mr. Homer. I do, and I can--
Mr. Steil. No, no, no. That is good. Okay. Straightforward
answer then. Singapore has enacted a regulatory framework for
stablecoins, so let's examine Singapore's experience as we
craft our own framework here in the United States. Is there
anything specifically we can learn from the Singapore
experience?
Mr. Homer. Sure. I think one thing that is important now
is that stablecoins will happen regardless of whether we want
them to happen or not. The U.S. dollar dominates stablecoins.
There is nothing stopping offshore entities from doing this
already. We should have it done in the U.S. so we can regulate
it on our own terms.
We can learn a lot from stablecoin frameworks being
proposed in other countries like Singapore and the European
Union. In some ways, they mirror much of what is reflected in
this proposal regarding reserve requirements. I think one
feature that is different that you see in other markets is a
tiering. Under this proposal, someone who issues $5 of
stablecoins is regulated in the same way as someone who issues
$5 billion worth of stablecoins, and in other country's
proposals, we see a tiering in terms of regulatory
requirements.
Mr. Steil. That is helpful. Thank you very much. Let me
stay with you, Mr. Homer, but let me shift gears somewhat
dramatically. The SEC recently issued a, ``Wells notice,'' to
Paxos that alleges the stablecoin, BUSD, is a security. We all
know one of the key prongs to the Howey test is that there will
be an expectation of profit. Could a purchaser of a stablecoin
have an expectation of profit?
Mr. Homer. It is hard to understand how a user of a
stablecoin could have an expectation of profit.
Mr. Steil. So, you would agree that stablecoins are not
securities, based on your answer, correct?
Mr. Homer. Correct.
Mr. Steil. Thank you. I think that is important for the
record. Let me shift gears, if I can, to you, Mr. Portilla. I
am assuming you have had an opportunity to review the ranking
member's alternative proposal ahead of this hearing?
Mr. Portilla. I have.
Mr. Steil. Did you review the section of the legislation
entitled, ``Risk Management for Contracted Services,'' which
requires Federal regulation of payment stablecoin issuers,
affiliates, and subsidiaries?
Mr. Portilla. I did.
Mr. Steil. And would you agree that the legislation
requires an entity without an existing Federal regulator to be
regulated by the Federal Reserve?
Mr. Portilla. That is correct.
Mr. Steil. So is it fair to say that entities that may not
issue stablecoins, but instead engaged in other market
activities, would end up being regulated by the Fed?
Mr. Portilla. Correct, if they provide the services in
that section.
Mr. Steil. And you agree that this is outside the scope of
the Fed's normal regulatory activities?
Mr. Portilla. It would be a new responsibility for them,
right.
Mr. Steil. Is this even in the Fed's area of expertise?
Mr. Portilla. I don't want to speak for them, but to my
knowledge, no.
Mr. Steil. It appears to me to be a bit of a question as
to why we would look for the Fed to engage in a regulatory
oversight role that is outside their area of expertise, so I
appreciate your feedback. I think it is broadly problematic. I
think it would further cause market confusion and potentially
conflict with other regulators. I appreciate your time.
Mr. Chairman, since you noted I could yield back time with
no disgrace, I will yield back to the Chair. Thank you.
Chairman Hill. The gentleman from Wisconsin yields back in
a most gracious manner.
The Chair now recognizes the ranking member of the Full
Committee, Ms. Waters, for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman. Mrs.
Reynolds Hand, the Democratic compromise draft that I posted
for today's hearing includes several critical provisions that
are missing from the Republican draft. One of them would give
the Federal Reserve Board the option to decline any
registration of a State-approved stablecoin issuer. This aligns
bank and non-bank stablecoins issuers with the current process
we have for State-chartered banks and would ensure a strong
Federal floor for registration. This means that stablecoin
issuers could not engage in regulatory arbitrage. Can you
elaborate on the importance of giving a Federal agency, like
the Fed, a role to approve payment stablecoins before they are
issued?
Ms. Hand. Thank you for the opportunity, Ranking Member
Waters. In this country, there is a strong role for Federal
regulators in approving all banks, the backbone of consumer
finance, and the cryptocurrency and the Fed overlap when banks
hold cryptocurrency as an asset on their balance sheets. And in
the last couple of years, we have seen that when the
traditional banking system and decentralized finance (DeFi)
begin to intersect, it can create significant questions and
structural issues. For example, although stablecoins may peg
their value to the same real-world asset, stabilization
mechanisms vary greatly.
This is one of the reasons payment stablecoins can impact
the monetary system, and why we need a role for the Fed in the
same way that there is the role for Federal regulators to
approve State-chartered banks. There has to be a role for the
Fed to review applications and reject them if they don't meet
certain requirements.
Ms. Waters. Thank you. That is an important issue that we
are dealing with, with stablecoins. Let me move on. One of the
most-devastating impacts of the FTX collapse resulted from the
intentional lack of customer asset segregation. The assets of
FTX's customers were used to fund personal loans for senior FTX
staff, and funneled into FTX founder, Sam Bankman-Fried's,
trading from Alameda Research. Customer funds were commingled
with the firm funds. When the exchange collapsed, commingled
customer assets largely vanished, and to this day are difficult
to recover. Some are unlikely to be recovered at all. However,
this is a different experience compared to FTX's Japanese
customers, who were largely made whole because Japan passed
strong regulations against the commingling of funds.
Unfortunately, only a few months after the FTX collapse, the
Republican stablecoin draft allows for the creation of
stablecoins but has no oversight of the wallets where they
would hold them.
Can you describe the importance of customer protections,
like the complete segregation of customer assets by issuers,
exchanges, wallet providers, and other entities? What are the
dangers presented by firms commingling customer assets with the
firm's own assets?
Ms. Hand. Briefly, custodial structures help protect
consumer funds, and it is important because if a firm goes
bankrupt, then consumers need to have a clear pathway to be
able to recover their funds. And as we saw in the court rulings
in Celsius, there is a clear gray area there, and we need clear
rules of the road, particularly around custodial wallets. We
need a segregation of consumer funds in these instances.
Ms. Waters. So, commingling is a serious issue. Again, we
have seen it with FTX, and we should be aware of that, and that
is one of the issues we have to resolve in this legislation.
Thank you, and I yield back the balance of my time.
Chairman Hill. The gentlewoman yields back. The gentleman
from Illinois, Mr. Casten, is recognized for 5 minutes.
Mr. Casten. Thank you, Mr. Chairman. Mr. Homer, I want to
just run through some hypotheticals with you as I think about
some of the mechanics of this bill. If I am a broker-dealer of
conventional equities, am I legally allowed to unilaterally
halt trades on a volatile security, or do I need to have the
regulator's approval for that?
Mr. Homer. I don't have the answer to that question right
now.
Mr. Casten. It is a, ``yes.'' I hope you would agree that
we would not want to give broker-dealers that power, give them
the conflicts of interest. I asked the question, because from
March 10th to March 12th, Coinbase made a unilateral decision.
Coinbase was registered as a broker-dealer, and made a
unilateral decision to pause USDC conversions after Circle
disclosed that they had $3.3 billion in exposure to Silicon
Valley Bank and they lost their peg. So, exchanges that are
registered as broker-dealers in the crypto space, is there
something unique about crypto? Should they have authorities
that we do not give to other broker-dealers because of the
conflicts of interest? It is not a super-complicated question.
Mr. Homer. I think that anyone who is registered as a
broker-dealer should experience a consistent set of regulatory
requirements.
Mr. Casten. Okay. That is great, because the implication
of that is that cryptocurrency exchanges should comply with
securities laws and be registered with the SEC.
Second question. Mr. Homer, I was trying to read your
background, and I don't know how long you have been at this
firm, but you are the managing member of a venture capital
fund. Is that right?
Mr. Homer. That is correct.
Mr. Casten. And does your fund invest in crypto firms?
Mr. Homer. In companies, yes. Not in tokens.
Mr. Casten. Okay. Do you receive or buy cryptocurrency
tokens in connections with those investments?
Mr. Homer. We have not.
Mr. Casten. Would you be open to that possibility with the
right deal and the structure?
Mr. Homer. I would not preclude it.
Mr. Casten. Okay. So if you did, once your contractual
lockout ends, however long that is, you are then allowed to
sell those tokens to the public immediately, right?
Mr. Homer. It depends on how it is structured, but in your
scenario, it sounds like yes.
Mr. Casten. I am just saying, legally; I am not saying how
you might structure it. I am just saying, just as a venture
fund, when your lockout period is over, you can sell that back,
because if you were subject to SEC registration, those would
first have to comply with Section 5 of the Securities Act and
be registered with the Commission, right?
Mr. Homer. I am guessing the answer is yes.
Mr. Casten. And furthermore, if you are getting paid in
these crypto tokens, you don't have to comply with Section
12(a)(1), which would allow individuals who might feel that
they had been defrauded, to sue you if there was something that
they thought was a fraudulent conveyance or something else,
right?
Mr. Homer. I am following.
Mr. Casten. I raise all this because this lack of
regulation in the crypto space--and I am not saying anything
about you personally; it is just that you are the only venture
capital guy up here--allows crypto startups to bypass
regulations so that you could exit your position quicker even
if it is defrauding investors. I am not saying that is your
intent, but I am saying there are a whole lot of problems here
with this lack of regulation, and I, frankly, don't think that
either of these bills go far enough to address that.
The next piece is, do non-bank stablecoin issuers have a
fiduciary obligation to meet customer demands for redemption?
Mr. Homer. Yes, they would.
Mr. Casten. Okay. When Circle saw that SVB was going
under, they tried to pull the $3.3 billion out. They were
meeting their obligations to their customers, right?
Mr. Homer. Yes.
Mr. Casten. Okay. Now in the case of SVB, $3.3 billion
wasn't going to make a difference in the overall troubles that
they were facing. But it is really easy to imagine that money
being in a smaller bank or stablecoin succeeding the way we are
talking about, and it all of a sudden being a massively
destabilizing event on our fiscal system if you have this
obligation to pull, right?
Mr. Homer. Yes. This is why I think prudential supervision
is important and prudential supervisors are the best set of
regulators.
Mr. Casten. No, I think there is a different issue here.
There is a good case for blockchain. There is a good case for
Web3. There is a good case for distributed ledger. Why are we
creating a currency within that mix that has access to our
financial system? If you want to buy this pen for three magic
ponies, we can do that. That is a barter transaction. Why are
we connecting this to our financial system?
And Ms. Reynolds Hand, I guess I will just end with you, if
you have any final thoughts on what risks we expose ourselves
to?
Chairman Hill. The gentleman's time has expired. I am just
sensitive to it since we have votes on the Floor, and I want to
get to Mr. Green. So, I yield to Mr. Green for 5 minutes, and
at the end of Mr. Green's questioning, the hearing will be
adjourned.
Mr. Green. Thank you, Mr. Chairman. And I thank the
witnesses for appearing. Let me just start by indicating to you
that I am very much concerned about the stability of our
currency. There is a war for currency supremacy. This war for
currency supremacy is one that involves countries that don't
always have our best interests at heart, and our reserve
currency is preeminent. It is something that we treasure, but
opposition in the world is dependent, to a certain extent, on
the validity of our currency. People trust us because of the
validity of our currency. They invest in our country and our
Treasury because of the validity of our currency.
So, my concern emanates from this belief that we must
proceed with caution. And as we proceed with caution, we must
keep in mind that the system we have, has some flaws, but it
isn't bad, it isn't the worst system in the world, and I want
to be very careful about how we do things to impact a system
that is fairly efficacious. It seems to be something that
others would love to have. In fact, they try to create it on a
daily basis.
Here is my concern for you non-bank financial companies.
Non-bank financial companies can issue stablecoins. What kind
of power are we giving to non-bank financial companies when
they can issue stablecoins? In a sense, someone might say they
are issuing currency of a sort.
Why don't we just start with you, Ms. Reynolds Hand? Could
you kindly comment on what we will be doing when we do this?
Ms. Hand. Congressman, I completely share your concern. I
was on the Hill as a staffer during the last financial crisis,
and since then, we have continued to see the proliferation of
non-bank financial services, i.e., fintech, explode and
eclipse, in some parts, the traditional banking system. And
that is a primary reason why we do need some clear rules of the
road. Unfortunately, via the mobile phones that consumers walk
around with, consumers now have access to these digital assets,
but they severely lack protections. And that is the only reason
why there is a need for legislation and clear rules of the road
in this space, but I do share your concern about how we proceed
forward.
We have a strong financial system. We have some solid
principles around which that system is based, and yet, because
there are clear vagaries and gaps in terms of regulation and
rules, new entrants are always entering the space and engaging
with consumers without adequate protections.
Mr. Green. Thank you.
Ms. Wang, just an additional predicate before you respond.
Our fiat currency is the envy of the world. Everybody wants the
dollar. If we allow circumstances to continue unabated without
the legislation, what can happen? Give me your opinions as to
how this can metamorphose into something.
Ms. Wang. Thank you, Congressman, for the question. I
think, on a global level, countries want to de-dollarize. They
want to have the dollar be less influential in international
trade. So if there are competing stablecoin legislations
elsewhere, they are going to promote their own national
currency and de-emphasize dollar-denominated stablecoins, so
having this bill would allow us to stay competitive.
And as you said, the U.S. dollar is the reserve currency. I
believe that, and I understand the concerns you have, but don't
paint all of us with the same brush, because there are those of
us who may be non-bank financial institutions, but we are
community organizations. We are grassroots organizations. We
support the work of local community banks. And we are doing
that work to ensure that the U.S. dollar works harder, and by
allowing us an opportunity to also--
Mr. Green. Let me recede. The chairman has been very
generous. Thank you, Mr. Chairman. Mr. Chairman, I am a
supporter of Ms. Waters' bill, and I am going to do what I can
to help us to have a good piece of legislation.
Chairman Hill. I thank the gentleman from Texas. And I
thank our witnesses, and I appreciate your patience. We have
two votes on the House Floor. We have other Members who do have
some questions. It won't be that many. We ask your indulgence.
And the committee will stand in recess until after votes.
[recess]
Mr. Timmons. [presiding]. The committee will come to
order. I now recognize myself for 5 minutes.
My colleagues across the aisle have asserted that all
stablecoin issuers must register with Federal regulators before
conducting business, including those that are regulated on the
State level.
Mr. Homer, although stablecoin issuers that go through the
State pathway are not also required to register with the
Federal Reserve under the McHenry proposal, would there still
be a significant role for the Federal Reserve to play, and what
would that role be under the McHenry proposal?
Mr. Homer. Thank you for the question, Congressman. There
would be a significant role for the Federal Reserve to play in
that scenario, namely, in two ways, the first being backstop
supervision. The Federal Reserve would have access to the books
and records of the companies that are regulated by the States
and would have the ability to step in if they felt they were
not being properly regulated, and also would be able to take
enforcement actions.
Mr. Timmons. Thank you for that. Both proposals noticed to
this hearing establish a list of factors that Federal
regulators must utilize when considering an application for a
given stablecoin issuer. Again, Mr. Homer, would you discuss
the factors in the McHenry proposal and how they provide the
bounds for what the banking regulators may and may not
consider?
Mr. Homer. Yes. Thank you for the question. The factors
include the financial requirements, including reserve assets,
etc. It includes character and fitness of management and
includes an analysis of risks and benefits.
Mr. Timmons. And what are the consequences of including
more open-ended or subjective factors, as contemplated in the
Waters proposal?
Mr. Homer. There are tradeoffs associated with doing that.
For companies/applicants in the space, it makes it more
difficult to understand your requirements and to put together a
complete application, and for regulators, it would give them
significant discretion to reject applications based on a
potentially unlimited set of reasons.
Mr. Timmons. And if our objective is to provide certainty
and a framework from which the market can operate, would the
McHenry or the Waters proposal accomplish that objective?
Mr. Homer. Yes. I think that the first noticed proposal
would provide greater certainty.
Mr. Timmons. Thank you. One risk identified in the
President's Working Group report on stablecoins was a lack of
transparency.
Mr. Portilla, would you describe how the draft legislation
attached to this hearing could help provide transparency and
how that transparency will in turn give consumers confidence in
stablecoins?
Mr. Portilla. Yes, for sure. Thank you for the question. I
think both of the proposals noticed for the hearing include
provisions that would enhance transparency for stablecoin
issuers. In particular, there is a requirement to disclose the
issuers' redemption policy, to establish procedures for timely
redemption, to publish the monthly composition of the reserve
assets, and to provide attestations of the accuracy of the
report of those disclosures to the relevant regulators. And
there are, in fact, criminal penalties associated with false
attestations, which should provide significant incentive for
management to make sure those attestations are correct and
provide accountability for when they are not.
Mr. Timmons. Thank you for that. Some claim that the State
regulatory framework under Chairman McHenry's legislation will
be insufficient to address anti-money laundering and financial
crime issues with stablecoins.
First of all, the bill requires all stablecoin issuers to
be treated as financial institutions for purposes of the Bank
Secrecy Act, which levels a number of requirements including
registering with the Financial Crimes Enforcement Network
(FinCEN) and submitting suspicious activity reports (SARs).
States may add additional enhanced requirements under their
framework.
Mr. Homer, again, can you describe how the New York DFS
considers anti-money laundering compliance when determining
whether to approve the application of a stablecoin?
Mr. Homer. Yes. Thank you for the question, Congressman.
It is one of the most significant factors. New York is a
leading regulator in the space, but it is not an easy
regulator, and it is still very challenging for companies to
get approval in New York, and rightfully so. This risk area is
one of the most-significant areas, I would say, where it takes
companies a while to really adequately meet those requirements.
The requirements in New York are incredibly robust, and look at
the policies and procedures a company has related to this
issue, including ensuring that adequate KYC is being done at
the time of issuance and at the time of redemption of
stablecoins.
Mr. Timmons. Thank you for that. I yield back.
And the Chair now recognizes Representative Nickel from
North Carolina for 5 minutes.
Mr. Nickel. Thank you so much, and I want to thank
Chairman Hill and Ranking Member Lynch for holding today's
hearing, and thanks so much to our witnesses for being with us
here today. I am hopeful that we can come to a bipartisan
agreement on stablecoin legislation as the status quo is both
risky for consumers and stifling for innovation. We also have
the opportunity with stablecoins to reinforce the dominance of
the U.S. dollar as the global reserve currency, all while
making it stronger, more accessible, and more competitive.
We are already seeing challenges to the dollar's influence
with the share of dollars in global currency reserves
decreasing from 66 percent to 58 percent since 2015. If the
dollar were to lose its status, there would be negative impacts
across our economy, in addition to national security concerns.
The dollar is the asset underlying 98 percent of stablecoin
transactions. If stablecoin use increases, the dollar will only
get stronger. By passing bipartisan stablecoin legislation to
provide regulatory clarity and improve the infrastructure on
which the U.S. dollar travels, we can ensure it remains the
global reserve currency.
Mr. Homer, I would like to start with you. Can you please
describe the role of stablecoins in supporting U.S. dollar-
dominance?
Mr. Homer. Thank you for the question, Congressman. I
believe stablecoins are the most significant way in which the
U.S. Government can ensure continued dollar dominance in a
digital era. We are seeing a transformation of money from
analog to digitized, and we are moving toward a digital native
era which stablecoins represent, and we see that in the form of
users in other countries wanting to hold U.S. dollar-
denominated stablecoins. If we want to maintain our ability to
engage in economic statecraft and use tools like sanctions,
having stablecoins be issued from the U.S. is essential to that
objective.
Mr. Nickel. And you kind of touched on this in your answer
here, but I would like to hear more about the national security
implications of the dollar losing its status as the global
reserve currency. How would this impact the effectiveness of
our sanctions, having stablecoin legislation?
Mr. Homer. Yes. Sanctions tools are only effective to the
extent to which payment instruments or payment systems are
denominated in dollars or involve U.S. leadership. And if
significant stablecoin issuance were to happen outside of the
U.S., it would lessen our ability to use sanctions tools in the
future.
Mr. Nickel. I think we are really close on a lot of the
different forms of legislation that I am seeing, but I am
concerned about the Federal Reserve Board having a very broad
veto authority to decline registrations by State-regulated
issuers of stablecoins. Are there certain scenarios where you
think the Fed should have this veto? How can we narrow this to
keep a strong Federal floor while also preserving North
Carolina's ability to regulate stablecoins in our dual banking
system? Mr. Homer?
Mr. Homer. I think we can look at some of what has
happened in other countries, places like the EU or even
Singapore, where there is a tiered approach, where issuers who
are below a certain threshold can be subject to subnational
regulation or a different regulatory regime. But once you have
reached a systemic or significantly-important level, then I
certainly think enhanced oversight would make sense.
Mr. Nickel. Thank you so much, and I yield back.
Mr. Flood. [presiding]. The gentleman yields back. And I
now recognize myself for 5 minutes. First of all, I want to
thank all of the witnesses who are here today.
My number-one concern on stablecoins is ensuring that there
is a robust State pathway for stablecoin issuers. Much like the
dual banking system, there should be an opportunity for
stablecoin issuers to be regulated at both the State and the
Federal level. This is important for a few reasons. First, it
makes it possible for States like Nebraska to come up with our
own regulatory frameworks for stablecoins. Over time, States
will learn from each other and adopt best practices from their
neighbors, reaching consensus on common issues and, ultimately,
better regulation across-the-board.
The problem with only Federal regulation is that it doesn't
undergo that natural iterative process. Instead, you have this
top-down approach that might be more difficult to change over
time, and that is not a system that fosters innovation. And it
is hard to argue that America's financial system built on this
two-tier Federal and State approach to regulation of banks
hasn't yielded great results for the United States. In the case
of stablecoins, we are talking about something that we may very
well have to revisit periodically as blockchain technology and
its use cases continue to develop. It is much better to have
several State regulators working in this area than just one or
two Federal regulators, who may require an act of Congress to
make technical changes.
Additionally, it creates opportunities for States to
develop specialization. Regulators can establish a reputation
as knowledgeable on a particular set of issues. Such a
reputation can then become a reason for a business to locate in
that State. My hope was to develop precisely that kind of
environment in Nebraska when, as a State senator, I wrote and
passed the Nebraska Financial Innovation Act.
Ms. Wang, in your testimony, you compared the State
regulatory pathway for stablecoins to the, ``laboratories of
democracy,'' that Constitutional scholars write about. Can you
elaborate on this point and on the importance of allowing
States to write some of their own rules?
Ms. Wang. I think that the State regulatory pathway is
absolutely critical for grassroots innovation, without which we
would not be able to have true bottom up diversity and
inclusion of our financial system. These grassroots innovators
are for the community, of the community, and by the community,
and we should be allowed to experiment and to fail safely.
Under Chairman McHenry's proposal, we would already be
required to meet the minimum Federal guidelines for issuance
under Section 4, backstopped by the Federal Reserve Board in
the event of exigent circumstances. In my view, there is no
constitutional reason to preempt State regulation in the case
where not all stablecoins may necessarily implicate interstate
commerce.
Mr. Flood. Thank you for that.
Mr. Homer, one of the claims we hear occasionally, and we
heard it today about a State pathway for stablecoin issuers, is
that it could lead to a so-called race to the bottom. As a
former New York State Department of Financial Services
executive deputy superintendent, would you mind just responding
to that claim?
Mr. Homer. Yes. I think under the proposal, it would be
very hard to imagine a race to the bottom. A Federal standard
is established, which is basically the New York standard. New
York best practices that have been tried and tested and proven
would be established as a Federal floor.
Mr. Flood. I would like to close by speaking just a little
bit on the two drafts noticed for this hearing. I am glad that
Ranking Member Waters and the Democrats have come forward with
a stablecoin proposal. I am hopeful that we can take serious
steps on this and lead because the United States needs to lead
here, not just for our country, but for the world.
However, when I look at Ranking Member Waters' bill, the
State pathway includes the following provisions: number one,
State-issued stablecoins must register with the Federal
Reserve, and the Fed is responsible for creating registration
requirements; number two, the Federal Reserve is directly
responsible for regulating and examining the State issuer; and
number three, the Federal Reserve may, if it chooses, enter
into a memorandum of understanding where it could delegate some
of the regulatory enforcement obligations to the State
regulator if they so choose.
To summarize, the Federal Reserve would be in charge of
processing applications, regulation, examination, and
enforcement. That is the whole ballgame. The Federal Reserve
would be responsible for all of the nuts and bolts of
regulating and overseeing State issuers, and they would
delegate some of their responsibilities only if they so choose.
To be frank, that is just not a State pathway in any meaningful
sense. And my number-one focus as a member of this subcommittee
is to maintain a State pathway, an opportunity for all of these
laboratories in our democracy, all of the different States to
be able to participate in a true two-tier system.
With that, I yield back. And I now recognize Mr. Torres.
Mr. Torres. Thank you, Mr. Chairman . There has been a
suggestion that State regulators cannot be trusted to regulate
State-licensed stablecoins without parental supervision from
the Federal Reserve. If State regulators can be trusted to
regulate State-chartered banks, then why can they not be
trusted to have analogous authority with respect to
stablecoins? Regulating fractionally-reserved banks that take
on credit risk strikes me as far more complicated than
regulating a fully-reserved stablecoin that takes on no credit
risk at all.
So, Mr. Homer, can you explain to me why there should be a
strong State option for fractional reserve banking but no
strong State option for stablecoin issuance? Imagine you are
ChatGPT, and I am a 5-year-old. Please explain the logic that
underlies that criticism.
Mr. Homer. It is really hard to make a rational argument
for that. I think, as you point out, fully-reserved stablecoins
and other forms of non-bank companies don't hold the same type
of risk as fractional companies. And States like New York have
really been the primary chartering entities or regulators for
non-bank companies in the history of the United States.
Mr. Torres. So, it certainly should be possible to set a
Federal floor that prevents regulatory arbitrage that prevents
a race to the bottom without subordinating State regulators,
like DFS, to the Federal Reserve?
Mr. Homer. Absolutely.
Mr. Torres. Okay. And let's be crystal clear, State
regulators, like DFS, have been more effective at crypto
regulation than the Federal Government. The SVB collapse
happened under the watch of the Federal Reserve. The FTX Ponzi
scheme happened under the watch of the Federal Government.
Federal regulators, like the SEC, spent more time targeting Kim
Kardashian than Sam Bankman-Fried. So, the evidence is crystal
clear that we have been poorly served by the SEC's regulatory
ambulance chasing. As far as the lessons learned from FTX,
those lessons should inform the development of a Federal
framework for regulating stablecoins. A lesson learned,
stablecoins should be fully reserved, and those reserves should
consist of 100 percent cash or cash equivalents. Raise your
hand if you agree.
[Hands raised.]
Mr. Torres. I imagine all of you agree. Lesson learned,
stablecoin reserves should be verified not only by self-
attestation, but also by a third-party audit. Please raise your
hand if you agree.
[Hands raised.]
Mr. Torres. Customers should have the right to immediately
redeem a stablecoin on a one-to-one basis. Please raise your
hand if you agree.
[Hands raised.]
Mr. Torres. And stablecoin issuers should be prohibited
from lending, leveraging, or commingling customer funds. Please
raise your hand if you agree.
[Hands raised.]
Mr. Torres. A federally-licensed stablecoin issuer should
have a single Federal regulator. Too many cooks in the kitchen
creates regulatory confusion and duplication. If a stablecoin
is a currency regulated by the Federal Reserve or trust
regulated by the OCC, it should not simultaneously be a
security regulated by the SEC. Do you agree with that, Mr.
Homer?
Mr. Homer. I do.
Mr. Torres. There is a common misconception that crypto
threatens the status of the dollar as the world's reserve
currency, but the experience of stablecoins has shown the exact
opposite. The fact that most stablecoins are pegged to the
dollar reinforces rather than challenges the reserve status of
the U.S. dollar.
Mr. Homer, you actually referenced competition. My
understanding is that, in the realm of financial technology,
China has largely been now competing with the United States.
The only fintech battleground on which the United States has
been now competing, China has been the domain of digital
currency, stablecoins. Dollar stablecoins have been far more
successful than China's failed attempt at a CBDC. Is that a
fair assessment?
Mr. Homer. It is a fair assessment, and it is because that
is what people throughout the world want. People want U.S.
dollar-denominated stablecoins.
Mr. Torres. And a common refrain heard from critics of
crypto in Congress is that crypto has no use case. But it seems
to me that blockchain enables real-time transactions,
stablecoin tokenizes the dollar, and the ability of a tokenized
dollar to move at the speed of the blockchain creates a better,
cheaper, and faster payment system, which would include the
potential for better, cheaper, and faster remittances for the
lowest-income Americans. Is that a fair assessment?
Mr. Homer. A very fair assessment, and we are already
seeing that happen.
Mr. Torres. Would anyone else like to comment on the use
cases of stablecoins?
[No response.]
Mr. Torres. The enthusiasm is overwhelming, I know. The 8
seconds you have, okay. Other than that, I yield back.
Mr. Flood. The gentleman yields back. I would like to
thank all of our witnesses for their testimony today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
[all]